Why prospects of Australia iron ore miners have suddenly brightened

Falling fuel costs and a softer Aussie dollar are bolstering the near-term prospects of Australia’s small miners, giving them a reprieve from the weakest iron ore prices in more than half a decade.

Operating margins have improved by A$16 ($13) per tonne for Atlas Iron Ltd and A$11 per tonne for BC Iron Ltd , according to RBC Capital, more than offseting the fall in iron ore prices of A$8-10 per tonne over the last quarter.

Miners operating in the once-prosperous Pilbara iron belt have laid off hundreds of workers as iron ore prices plummeted and margins shrank – or in some cases vanished. Junior miners such as Atlas Iron and BC Iron have been the hardest hit. As the global supply glut deepens, any drop in production costs and other expenses is a boon.

Benchmark Brent and U.S. crude are at their weakest since April 2009, lowering fuel costs. The key Australia-China freight rate has also halved to less than $5 per tonne from early November. And making Australian iron ore more export-competitive, the local dollar has dropped six cents against the greenback from mid-November peaks.

The prospect of better results has not gone unnoticed. Since Dec. 16, the S&P/ASX 300 Metals and Mining Index <.AXMM>, which includes shares of Sydney-listed iron ore miners, has risen about 8 percent from its lowest since 2009.